Attached files

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EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 - Pacific Oak Strategic Opportunity REIT, Inc.kbssorq12018exhibit312.htm
EX-32.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906 - Pacific Oak Strategic Opportunity REIT, Inc.kbssorq12018exhibit322.htm
EX-32.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 906 - Pacific Oak Strategic Opportunity REIT, Inc.kbssorq12018exhibit321.htm
EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 - Pacific Oak Strategic Opportunity REIT, Inc.kbssorq12018exhibit311.htm
EX-10.5 - NOTE (CITY TOWER) - Pacific Oak Strategic Opportunity REIT, Inc.kbssorq12018exhibit105.htm
EX-10.4 - DEED OF TRUST (CITY TOWER) - Pacific Oak Strategic Opportunity REIT, Inc.kbssorq12018exhibit104.htm
EX-10.3 - LOAN AGREEMENT (CITY TOWER) - Pacific Oak Strategic Opportunity REIT, Inc.kbssorq12018exhibit103.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________________________
 
FORM 10-Q
______________________________________________________
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2018
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission file number 000-54382
______________________________________________________
 
KBS STRATEGIC OPPORTUNITY REIT, INC.
(Exact Name of Registrant as Specified in Its Charter)
______________________________________________________
Maryland
 
26-3842535
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
800 Newport Center Drive, Suite 700
Newport Beach, California
 
92660
(Address of Principal Executive Offices)
 
(Zip Code)
(949) 417-6500
(Registrant’s Telephone Number, Including Area Code)
______________________________________________________________________
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer
 
¨
 
Accelerated Filer
 
¨
Non-Accelerated Filer
 
x  (Do not check if a smaller reporting company)
 
Smaller reporting company
 
¨
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨  No  x
As of May 4, 2018, there were 64,745,585 outstanding shares of common stock of KBS Strategic Opportunity REIT, Inc.



KBS STRATEGIC OPPORTUNITY REIT, INC.
FORM 10-Q
March 31, 2018
INDEX 
PART I.
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
Item 3.
 
Item 4.
PART II.
 
Item 1.
 
Item 1A.
 
Item 2.
 
Item 3.
 
Item 4.
 
Item 5.
 
Item 6.

1

PART I.
FINANCIAL INFORMATION
Item 1.
Financial Statements


KBS STRATEGIC OPPORTUNITY REIT, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
 
 
March 31, 2018
 
December 31, 2017
 
 
(unaudited)
 
 
Assets
 
 
 
 
Real estate held for investment, net
 
$
768,514

 
$
532,867

Real estate equity securities
 
89,015

 
90,063

Real estate debt securities, net
 
17,858

 
17,751

Total real estate and real estate-related investments, net
 
875,387

 
640,681

Cash and cash equivalents
 
148,760

 
366,512

Restricted cash
 
11,453

 
10,670

Investments in unconsolidated joint ventures
 
52,813

 
55,577

Rents and other receivables, net
 
11,932

 
9,821

Above-market leases, net
 
3,801

 
131

Prepaid expenses and other assets
 
17,677

 
18,182

Total assets
 
$
1,121,823

 
$
1,101,574

Liabilities and equity
 
 
 
 
Notes and bonds payable, net
 
$
689,754

 
$
603,043

Accounts payable and accrued liabilities
 
15,123

 
16,686

Due to affiliate
 
47

 
26

Distribution payable
 

 
187,914

Below-market leases, net
 
4,379

 
2,843

Other liabilities
 
14,512

 
16,966

Redeemable common stock payable
 

 
8,595

Total liabilities
 
723,815

 
836,073

Commitments and contingencies (Note 14)
 

 

Redeemable common stock
 
8,983

 
4,518

Equity
 
 
 
 
KBS Strategic Opportunity REIT, Inc. stockholders’ equity
 
 
 
 
Preferred stock, $.01 par value; 10,000,000 shares authorized, no shares issued and outstanding
 

 

Common stock, $.01 par value; 1,000,000,000 shares authorized, 64,745,413 and 52,053,817 shares issued and outstanding as of March 31, 2018 and December 31, 2017, respectively
 
647

 
521

Additional paid-in capital
 
538,972

 
388,800

Cumulative distributions and net income
 
(152,551
)
 
(155,454
)
Accumulated other comprehensive income
 

 
25,146

Total KBS Strategic Opportunity REIT, Inc. stockholders’ equity
 
387,068

 
259,013

Noncontrolling interests
 
1,957

 
1,970

Total equity
 
389,025

 
260,983

Total liabilities and equity
 
$
1,121,823

 
$
1,101,574

See accompanying condensed notes to consolidated financial statements.

2

PART I.
FINANCIAL INFORMATION (CONTINUED)
Item 1.
Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except share and per share amounts)
 
 
Three Months Ended March 31,
 
 
2018
 
2017
Revenues:
 
 
 
 
Rental income
 
$
15,181

 
$
30,646

Tenant reimbursements
 
2,682

 
5,637

Other operating income
 
221

 
1,553

Interest income from real estate debt securities
 
501

 
160

Dividend income from real estate equity securities
 
1,051

 

Total revenues
 
19,636

 
37,996

Expenses:
 
 
 
 
Operating, maintenance, and management
 
5,487

 
10,908

Real estate taxes and insurance
 
2,339

 
4,737

Asset management fees to affiliate
 
1,825

 
2,748

General and administrative expenses
 
2,052

 
1,744

Foreign currency transaction loss, net
 
997

 
4,671

Depreciation and amortization
 
7,265

 
14,600

Interest expense
 
6,591

 
9,386

Total expenses
 
26,556

 
48,794

Other (loss) income:
 
 
 
 
Income from unconsolidated joint venture
 
53

 
1,869

Equity in loss of unconsolidated joint ventures
 
(2,378
)
 
(154
)
Other interest income
 
930

 
25

Unrealized loss on real estate equity securities
 
(16,011
)
 

Gain on sale of real estate
 
624

 

Total other (loss) income, net
 
(16,782
)
 
1,740

Net loss
 
(23,702
)
 
(9,058
)
Net loss (income) attributable to noncontrolling interests
 
21

 
(34
)
Net loss attributable to common stockholders
 
$
(23,681
)
 
$
(9,092
)
Net loss per common share, basic and diluted
 
$
(0.38
)
 
$
(0.16
)
Weighted-average number of common shares outstanding, basic and diluted
 
62,526,798

 
56,782,447

See accompanying condensed notes to consolidated financial statements.

3

PART I.
FINANCIAL INFORMATION (CONTINUED)
Item 1.
Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.
CONSOLIDATED STATEMENTS OF EQUITY
For the Year Ended December 31, 2017 and the Three Months Ended March 31, 2018
(unaudited)
(dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common Stock
 
Additional
Paid-in Capital
 
Cumulative Distributions and Net Income
 
Accumulated Other Comprehensive Income
 
Total Stockholders' Equity
 
Noncontrolling Interests
 
Total Equity
 
Shares
 
Amounts
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2016
56,775,767

 
$
568

 
$
455,373

 
$
(162,289
)
 
$

 
$
293,652

 
$
1,898

 
$
295,550

Net income (loss)

 

 

 
210,644

 

 
210,644

 
(64
)
 
210,580

Other comprehensive income

 

 

 

 
25,146

 
25,146

 

 
25,146

Issuance of common stock
585,192

 
6

 
8,660

 

 

 
8,666

 

 
8,666

Transfers to redeemable common stock

 

 
(498
)
 

 

 
(498
)
 

 
(498
)
Redemptions of common stock
(5,307,142
)
 
(53
)
 
(74,727
)
 

 

 
(74,780
)
 

 
(74,780
)
Distributions declared

 

 

 
(203,809
)
 

 
(203,809
)
 

 
(203,809
)
Other offering costs

 

 
(8
)
 

 

 
(8
)
 

 
(8
)
Noncontrolling interests contributions

 

 

 

 

 

 
158

 
158

Distributions to noncontrolling interests

 

 

 

 

 

 
(22
)
 
(22
)
Balance, December 31, 2017
52,053,817

 
$
521

 
$
388,800

 
$
(155,454
)
 
$
25,146

 
$
259,013

 
$
1,970

 
$
260,983

Cumulative effect adjustments to retained earnings

 

 

 
27,618

 
(25,146
)
 
2,472

 

 
2,472

Net loss

 

 

 
(23,681
)
 

 
(23,681
)
 
(21
)
 
(23,702
)
Issuance of common stock
41,681

 
1

 
478

 

 

 
479

 

 
479

Stock distribution issued
13,069,487

 
130

 
150,169

 

 

 
150,299

 

 
150,299

Transfers from redeemable common stock

 

 
4,130

 

 

 
4,130

 

 
4,130

Redemptions of common stock
(419,572
)
 
(5
)
 
(4,605
)
 

 

 
(4,610
)
 

 
(4,610
)
Distributions declared

 

 

 
(1,034
)
 

 
(1,034
)
 

 
(1,034
)
Noncontrolling interests contributions

 

 

 

 

 

 
8

 
8

Balance, March 31, 2018
64,745,413

 
$
647

 
$
538,972

 
$
(152,551
)
 
$

 
$
387,068

 
$
1,957

 
$
389,025

See accompanying condensed notes to consolidated financial statements.

4

PART I.
FINANCIAL INFORMATION (CONTINUED)
Item 1.
Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
 
 
Three Months Ended March 31,
 
 
2018
 
2017
Cash Flows from Operating Activities:
 
 
 
 
Net loss
 
$
(23,702
)
 
$
(9,058
)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
 
 
 
 
Equity in loss of unconsolidated joint ventures
 
2,378

 
154

Depreciation and amortization
 
7,265

 
14,600

Unrealized loss on real estate equity securities
 
16,011

 

Gain on real estate
 
(624
)
 

Unrealized (gain) loss on interest rate caps
 
(31
)
 
57

Deferred rent
 
(745
)
 
(925
)
Bad debt recovery
 
(366
)
 
(36
)
Amortization of above- and below-market leases, net
 
(226
)
 
(894
)
Amortization of deferred financing costs
 
789

 
1,299

Interest accretion on real estate debt securities
 
(107
)
 
(69
)
Net amortization of discount and (premium) on bond and notes payable
 
14

 
11

Foreign currency transaction loss, net
 
997

 
4,671

Changes in assets and liabilities:
 
 
 
 
Rents and other receivables
 
(1,000
)
 
(340
)
Prepaid expenses and other assets
 
(1,900
)
 
(3,396
)
Accounts payable and accrued liabilities
 
(3,802
)
 
(3,767
)
Due from affiliate
 

 
(269
)
Due to affiliates
 
21

 
(28
)
Other liabilities
 
15

 
1,381

Net cash (used in) provided by operating activities
 
(5,013
)
 
3,391

Cash Flows from Investing Activities:
 
 
 
 
Acquisitions of real estate
 
(238,170
)
 
(82,235
)
Improvements to real estate
 
(5,039
)
 
(5,493
)
Proceeds from sales of real estate, net
 
2,542

 

Insurance proceeds received for property damages
 

 
744

Purchase of interest rate cap
 

 
(107
)
Distributions of capital from unconsolidated joint ventures
 
386

 
59,157

Investment in real estate securities
 
(14,963
)
 

Investment in real estate debt securities, net
 

 
(5,000
)
Funding of development obligations
 
(621
)
 
(159
)
Net cash used in investing activities
 
(255,865
)
 
(33,093
)
Cash Flows from Financing Activities:
 
 
 
 
Proceeds from notes and bonds payable
 
89,000

 
87,405

Principal payments on notes and bonds payable
 
(857
)
 
(35,808
)
Payments of deferred financing costs
 
(1,227
)
 
(1,329
)
Payments to redeem common stock
 
(4,610
)
 
(3,681
)
Payments of prepaid other offering costs
 
(213
)
 
(140
)
Distributions paid
 
(38,170
)
 
(2,323
)
Noncontrolling interests contributions
 
8

 
1

Distributions to noncontrolling interests
 

 
(7
)
Net cash provided by financing activities
 
43,931

 
44,118

Effect of exchange rate changes on cash, cash equivalents and restricted cash
 
(22
)
 
362

Net (decrease) increase in cash, cash equivalents and restricted cash
 
(216,969
)
 
14,778

Cash, cash equivalents and restricted cash, beginning of period
 
377,182

 
64,450

Cash, cash equivalents and restricted cash, end of period
 
$
160,213

 
$
79,228

See accompanying condensed notes to consolidated financial statements.

5

PART I.
FINANCIAL INFORMATION (CONTINUED)
Item 1.
Financial Statements (continued)
KBS STRATEGIC OPPORTUNITY REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(unaudited)



1.
ORGANIZATION
KBS Strategic Opportunity REIT, Inc. (the “Company”) was formed on October 8, 2008 as a Maryland corporation and elected to be taxed as a real estate investment trust (“REIT”) beginning with the taxable year ended December 31, 2010. The Company conducts its business primarily through KBS Strategic Opportunity (BVI) Holdings, Ltd. (“KBS Strategic Opportunity BVI”), a private company limited by shares according to the British Virgin Islands Business Companies Act, 2004, which was incorporated on December 18, 2015 and is authorized to issue a maximum of 50,000 common shares with no par value. Upon incorporation, KBS Strategic Opportunity BVI issued one certificate containing 10,000 common shares with no par value to KBS Strategic Opportunity Limited Partnership (the “Operating Partnership”), a Delaware limited partnership formed on December 10, 2008. The Company is the sole general partner of, and owns a 0.1% partnership interest in the Operating Partnership. KBS Strategic Opportunity Holdings LLC (“REIT Holdings”), a Delaware limited liability company formed on December 9, 2008, owns the remaining 99.9% interest in the Operating Partnership and is its sole limited partner. The Company is the sole member and manager of REIT Holdings.
Subject to certain restrictions and limitations, the business of the Company is externally managed by KBS Capital Advisors LLC (the “Advisor”), an affiliate of the Company, pursuant to an advisory agreement the Company renewed with the Advisor on October 8, 2017 (the “Advisory Agreement”). The Advisor conducts the Company’s operations and manages its portfolio of real estate, real estate-related debt securities and other real estate-related investments.
On January 8, 2009, the Company filed a registration statement on Form S-11 with the Securities and Exchange Commission (the “SEC”) to offer a minimum of 250,000 shares and a maximum of 140,000,000 shares of common stock for sale to the public (the “Offering”), of which 100,000,000 shares were registered in a primary offering and 40,000,000 shares were registered to be sold under the Company’s dividend reinvestment plan. The SEC declared the Company’s registration statement effective on November 20, 2009. The Company ceased offering shares of common stock in its primary offering on November 14, 2012 and continues to offer shares under its dividend reinvestment plan.
The Company sold 56,584,976 shares of common stock in its primary offering for gross offering proceeds of $561.7 million. As of March 31, 2018, the Company had sold 6,662,042 shares of common stock under its dividend reinvestment plan for gross offering proceeds of $74.5 million. Also, as of March 31, 2018, the Company had redeemed 11,867,335 shares for $156.4 million. As of March 31, 2018, the Company had issued 13,069,487 shares of common stock in connection with the December 2017 special dividend. Additionally, on December 29, 2011 and October 23, 2012, the Company issued 220,994 shares and 55,249 shares of common stock, respectively, for $2.0 million and $0.5 million, respectively, in private transactions exempt from the registration requirements pursuant to Section 4(2) of the Securities Act of 1933.
On March 2, 2016, KBS Strategic Opportunity BVI filed a final prospectus with the Israel Securities Authority for a proposed offering of up to 1,000,000,000 Israeli new Shekels of Series A debentures (the “Debentures”) at an annual interest rate not to exceed 4.25%. On March 1, 2016, KBS Strategic Opportunity BVI commenced the institutional tender of the Debentures and accepted application for 842.5 million Israeli new Shekels. On March 7, 2016, KBS Strategic Opportunity BVI commenced the public tender of the Debentures and accepted 127.7 million Israeli new Shekels.  In the aggregate, KBS Strategic Opportunity BVI accepted 970.2 million Israeli new Shekels (approximately $249.2 million as of March 8, 2016) in both the institutional and public tenders at an annual interest rate of 4.25%.  KBS Strategic Opportunity BVI issued the Debentures on March 8, 2016. The terms of the Debentures require principal installment payments equal to 20% of the face value of the Debentures on March 1st of each year from 2019 to 2023.
In connection with the above-referenced offering, on March 8, 2016, the Operating Partnership assigned to KBS Strategic Opportunity BVI all of its interests in the subsidiaries through which the Company indirectly owns all of its real estate and real estate-related investments.  The Operating Partnership owns all of the issued and outstanding equity of KBS Strategic Opportunity BVI.  As a result of these transactions, the Company now holds all of its real estate and real estate-related investments indirectly through KBS Strategic Opportunity BVI.

6

PART I.
FINANCIAL INFORMATION (CONTINUED)
Item 1.
Financial Statements (continued)
KBS STRATEGIC OPPORTUNITY REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2018
(unaudited)

As of March 31, 2018, the Company consolidated six office properties, one office portfolio consisting of four office buildings and 14 acres of undeveloped land, one office/flex/industrial portfolio consisting of 21 buildings, one retail property, two apartment properties and three investments in undeveloped land with approximately 1,100 developable acres. The Company also owned three investments in unconsolidated joint ventures, an investment in real estate debt securities and three investments in real estate equity securities.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
There have been no significant changes to the Company’s accounting policies since it filed its audited financial statements in its Annual Report on Form 10-K for the year ended December 31, 2017, except for the Company’s adoption of the revenue recognition and financial instruments standards issued by the Financial Accounting Standards Board (“FASB”) effective on January 1, 2018. For further information about the Company’s accounting policies, refer to the Company’s consolidated financial statements and notes thereto for the year ended December 31, 2017 included in the Company’s Annual Report on Form 10-K filed with the SEC.
Principles of Consolidation and Basis of Presentation
The accompanying unaudited consolidated financial statements and condensed notes thereto have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information as contained within the FASB Accounting Standards Codification (“ASC”) and the rules and regulations of the SEC, including the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the unaudited consolidated financial statements do not include all of the information and footnotes required by GAAP for audited financial statements. In the opinion of management, the financial statements for the unaudited interim periods presented include all adjustments, which are of a normal and recurring nature, necessary for a fair and consistent presentation of the results for such periods. Operating results for the three months ended March 31, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.
The consolidated financial statements include the accounts of the Company, REIT Holdings, the Operating Partnership, KBS Strategic Opportunity BVI and their direct and indirect wholly owned subsidiaries, and joint ventures in which the Company has a controlling interest. All significant intercompany balances and transactions are eliminated in consolidation.
Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could materially differ from those estimates.
Redeemable Common Stock
The Company has adopted a share redemption program that may enable stockholders to sell their shares to the Company in limited circumstances.
Pursuant to the share redemption program there are several limitations on the Company’s ability to redeem shares:
Unless the shares are being redeemed in connection with a stockholder’s death, “qualifying disability” or “determination of incompetence” (each as defined under the share redemption program), the Company may not redeem shares until the stockholder has held the shares for one year.

7

PART I.
FINANCIAL INFORMATION (CONTINUED)
Item 1.
Financial Statements (continued)
KBS STRATEGIC OPPORTUNITY REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2018
(unaudited)

The Company may not redeem more than $3.0 million of shares in a given quarter (excluding shares redeemed in connection with a stockholder’s death, “qualifying disability” or “determination of incompetence”). To the extent that the Company redeems less than $3.0 million of shares (excluding shares redeemed in connection with a stockholder’s death, “qualifying disability” or “determination of incompetence”) in a given fiscal quarter, any remaining excess capacity to redeem shares in such fiscal quarter will be added to the Company’s capacity to otherwise redeem shares (excluding shares redeemed in connection with a stockholder’s death, “qualifying disability” or “determination of incompetence”) during succeeding fiscal quarters.  The last $1.0 million of net proceeds from the dividend reinvestment plan during the prior year is reserved exclusively for shares redeemed in connection with a stockholder’s death, “qualifying disability,” or “determination of incompetence”. The share redemption plan also provides that, to the extent that in the last month of any calendar year the amount of redemption requests in connection with a stockholder’s death, “qualifying disability or “determination of incompetence” is less than the $1.0 million reserved for such redemptions under the share redemption plan, any excess funds may be used to redeem shares not requested in connection with a stockholder’s death, “qualifying disability or “determination of incompetence” during such month. The Company may increase or decrease this limit upon ten business days’ notice to stockholders.  The Company’s board of directors may approve an increase in this limit to the extent that the Company has received proceeds from asset sales or the refinancing of debt or for any other reason deemed appropriate by the board of directors.
During any calendar year, the Company may redeem no more than 5% of the weighted-average number of shares outstanding during the prior calendar year.
The Company has no obligation to redeem shares if the redemption would violate the restrictions on distributions under Maryland law, which prohibits distributions that would cause a corporation to fail to meet statutory tests of solvency.
Effective December 30, 2016, pursuant to the tenth amended and restated share redemption program, except for redemptions made upon a stockholder’s death, “qualifying disability” or “determination of incompetence”, the price at which the Company began to redeem shares is 95% of the Company’s most recent estimated value per share as of the applicable redemption date.  Upon the death, “qualifying disability” or “determination of incompetence” of a stockholder, the redemption price continued to be equal to the Company’s most recent estimated value per share.
The Company’s board of directors may amend, suspend or terminate the share redemption program with ten business days’ notice to its stockholders. The Company may provide this notice by including such information in a Current Report on Form 8-K or in the Company’s annual or quarterly reports, all publicly filed with the SEC, or by a separate mailing to its stockholders.
In anticipation of a self-tender offer in order to make liquidity available to stockholders in excess of that permitted under the share redemption program, on March 14, 2018, the Company’s board of directors approved a temporary suspension of the share redemption program starting with the March 2018 redemption period, including any unsatisfied requests from prior redemption periods.In connection with its approval of the Self-Tender (defined below), the Company’s board of directors approved the reopening of the share redemption program for the June 2018 redemption period, meaning no redemptions have been or will be made in March, April or May 2018 (including those requested following a stockholder’s death, qualifying disability or determination of incompetence). The Company has cancelled all outstanding redemption requests under the share redemption program and is not accepting any redemption requests under the share redemption program during the term of the Self-Tender.
On April 23, 2018, the Company commenced a self-tender offer (the “Self-Tender”) for up to 8,234,217 shares at a price of $10.93 per share, or approximately $90 million of shares.

8

PART I.
FINANCIAL INFORMATION (CONTINUED)
Item 1.
Financial Statements (continued)
KBS STRATEGIC OPPORTUNITY REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2018
(unaudited)

The Company records amounts that are redeemable under the share redemption program as redeemable common stock in its consolidated balance sheets because the shares will be mandatorily redeemable at the option of the holder and therefore their redemption will be outside the control of the Company. However, because the amounts that can be redeemed will be determinable and only contingent on an event that is likely to occur (e.g., the passage of time), the Company presents the net proceeds from the current year and prior year DRP, net of current year redemptions, as redeemable common stock in its consolidated balance sheets.
The Company classifies as liabilities financial instruments that represent a mandatory obligation of the Company to redeem shares. The Company’s redeemable common shares are contingently redeemable at the option of the holder. When the Company determines it has a mandatory obligation to repurchase shares under the share redemption program, it will reclassify such obligations from temporary equity to a liability based upon their respective settlement values.
The Company limits the dollar value of shares that may be redeemed under the program as described above. During the three months ended March 31, 2018, the Company had redeemed $4.6 million of common stock, of which $4.4 million relates to delayed December 2017 redemptions. There were no unfulfilled redemption requests received in good order under the share redemption program as of March 31, 2018 as a result of the temporary suspension. The Company recorded $8.6 million of other liabilities on the Company’s balance sheet as of December 31, 2017 related to unfulfilled redemption requests received in good order under the share redemption program. Based on the amount of net proceeds raised from the sale of shares under the dividend reinvestment plan during 2017, the Company has $8.5 million available for redemptions in the remainder of 2018, including shares that are redeemed in connection with a stockholders’ death, “qualifying disability” or “determination of incompetence,” subject to the limitations described above.
Revenue Recognition
Effective January 1, 2018, the Company adopted ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU No. 2014-09”), using the modified retrospective approach, which requires a cumulative effect adjustment as of the date of the Company’s adoption.  Under the modified retrospective approach, an entity may also elect to apply this standard to either (i) all contracts as of January 1, 2018 or (ii) only to contracts that were not completed as of January 1, 2018.  A completed contract is a contract for which all (or substantially all) of the revenue was recognized under legacy GAAP that was in effect before the date of initial application. The Company elected to apply this standard only to contracts that were not completed as of January 1, 2018. 
Based on the Company’s evaluation of contracts within the scope of ASU No. 2014-09, revenue that is impacted by ASU No. 2014-09 includes revenue generated by sales of real estate, other operating income and tenant reimbursements for substantial services earned at the Company’s properties. The recognition of such revenue will occur when the services are provided and the performance obligations are satisfied. For the three months ended March 31, 2018, tenant reimbursements for substantial services accounted for under ASU No. 2014-09 were $0.4 million, which was included in tenant reimbursements on the accompanying statements of operations. 
Sale of Real Estate
Prior to January 1, 2018, gains on real estate sold were recognized using the full accrual method at closing when collectibility of the sales price was reasonably assured, the Company was not obligated to perform additional activities that may be considered significant, the initial investment from the buyer was sufficient and other profit recognition criteria had been satisfied. Gain on sales of real estate may have been deferred in whole or in part until the requirements for gain recognition had been met.
Effective January 1, 2018, the Company adopted the guidance of ASC 610-20, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (“ASC 610-20”), which  applies to sales or transfers to noncustomers of nonfinancial assets or in substance nonfinancial assets that do not meet the definition of a business.  Generally, the Company’s sales of real estate would be considered a sale of a nonfinancial asset as defined by ASC 610-20.

9

PART I.
FINANCIAL INFORMATION (CONTINUED)
Item 1.
Financial Statements (continued)
KBS STRATEGIC OPPORTUNITY REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2018
(unaudited)

ASC 610-20 refers to the revenue recognition principles under ASU No. 2014-09.  Under ASC 610-20, if the Company determines it does not have a controlling financial interest in the entity that holds the asset and the arrangement meets the criteria to be accounted for as a contract, the Company would derecognize the asset and recognize a gain or loss on the sale of the real estate when control of the underlying asset transfers to the buyer.  As a result of the adoption of ASC 610-20 on January 1, 2018, the Company recorded a cumulative effect adjustment to increase retained earnings by $2.5 million to recognize the deferred gain from the sale of 102 developable acres at Park Highlands that closed on May 1, 2017, as control of the sold acres had transferred to the buyers at closing. 
As of January 1, 2018 and March 31, 2018, the Company had recorded contract liabilities of $1.7 million and $2.0 million, respectively, related to deferred proceeds received from the buyers of the Park Highlands land sales and another developer for the value of land that was contributed to a master association which is consolidated by the Company, which was included in other liabilities on the accompanying consolidated balance sheets.
Real Estate Equity Securities
The Company’s real estate equity securities are carried at their estimated fair value based on quoted market prices for the security, net of any discounts for restrictions on the sale of the security. Any discount for lack of marketability is estimated using an option pricing model. Transaction costs that are directly attributable to the acquisition of real estate equity securities are capitalized to its cost basis.
Prior to the Company’s adoption of ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU No. 2016-01”) on January 1, 2018, the Company classified its investments in real estate equity securities as available-for-sale and unrealized gains and losses were reported in accumulated other comprehensive income (loss). Upon the sale of a security, the previously recognized unrealized gain (loss) would be reversed out of accumulated other comprehensive income (loss) and the actual realized gain (loss) recognized in earnings.  Effective January 1, 2018, unrealized gains and losses on real estate equity securities are recognized in earnings.  Upon adoption of ASU No. 2016-01 on January 1, 2018, the Company recorded a $25.1 million cumulative effect adjustment to retained earnings related to the unrealized gain on real estate equity securities previously reported in accumulated other comprehensive income prior to January 1, 2018. 
Investment in Unconsolidated Joint Ventures
Equity Investment Without Readily Determinable Value
Prior to the adoption of ASU No. 2016-01 on January 1, 2018, the Company accounted for investments in unconsolidated joint venture entities in which the Company did not have the ability to exercise significant influence and had virtually no influence over partnership operating and financial policies using the cost method of accounting.  Under the cost method, income distributions from the partnership were recognized in other income.  Distributions that exceed the Company’s share of earnings were applied to reduce the carrying value of the Company’s investment and any capital contributions increased the carrying value of the Company’s investment.  On a quarterly basis, the Company evaluated its cost method investment in an unconsolidated joint venture for other-than-temporary impairments.  The fair value of a cost method investment was not estimated if there were no identified events or changes in circumstances that indicated a significant adverse effect on the fair value of the investment. 
In accordance with ASU No. 2016-01, the Company may elect to measure an equity investment without a readily determinable value that does not qualify for the practical expedient to estimate fair value using the net asset value per share, at its cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.  The Company elected to measure its investment in the NIP Joint Venture (defined in Note 12) in accordance with the above guidance, applying it prospectively, and as of January 1, 2018 and March 31, 2018, recorded its investment in the NIP Joint Venture at a cost basis of $3.7 million and $3.3 million, respectively. 

10

PART I.
FINANCIAL INFORMATION (CONTINUED)
Item 1.
Financial Statements (continued)
KBS STRATEGIC OPPORTUNITY REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2018
(unaudited)

Segments
The Company has invested in non-performing loans, opportunistic real estate and other real estate-related assets. In general, the Company intends to hold its investments in non-performing loans, opportunistic real estate and other real estate‑related assets for capital appreciation. Traditional performance metrics of non-performing loans, opportunistic real estate and other real estate-related assets may not be meaningful as these investments are generally non-stabilized and do not provide a consistent stream of interest income or rental revenue. These investments exhibit similar long-term financial performance and have similar economic characteristics. These investments typically involve a higher degree of risk and do not provide a constant stream of ongoing cash flows. As a result, the Company’s management views non-performing loans, opportunistic real estate and other real estate-related assets as similar investments. Substantially all of its revenue and net income (loss) is from non-performing loans, opportunistic real estate and other real estate-related assets, and therefore, the Company currently aggregates its operating segments into one reportable business segment.
Per Share Data
Basic net income (loss) per share of common stock is calculated by dividing net income (loss) attributable to common stockholders by the weighted-average number of shares of common stock issued and outstanding during such period. Diluted net income (loss) per share of common stock equals basic net income (loss) per share of common stock as there were no potentially dilutive securities outstanding during the three months ended March 31, 2018 and 2017.
Distributions declared per share were $0.01597500 and $0.09246575 during the three months ended March 31, 2018 and 2017, respectively.
Square Footage, Occupancy and Other Measures
Any references to square footage, occupancy or annualized base rent are unaudited and outside the scope of the Company’s independent registered public accounting firm’s review of the Company’s financial statements in accordance with the standards of the United States Public Company Accounting Oversight Board.
Recently Issued Accounting Standards Updates
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU No. 2016-02”). The amendments in ASU No. 2016-02 change the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. The standard requires lessors to identify lease and non-lease components under their leasing arrangements and allocate the total consideration in the lease agreement to these lease and non-lease components based on their relative standalone selling prices. Non-lease components will be subject to the new revenue recognition standard upon the Company’s adoption of the new leasing standard on January 1, 2019. ASU No. 2016-02 is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption of ASU No. 2016-02 as of its issuance is permitted. The new leases standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. In March 2018, the FASB affirmed a proposed amendment to the leases ASU, which would add a transition option to the new leases standard that would allow entities to apply the transition provisions of the new standard at its adoption date instead of the earliest comparative periods presented in its financial statements. The FASB also tentatively approved a practical expedient that would permit lessors to not separate lease and non-lease components if certain conditions are met. The Company is currently evaluating the impact of adopting the new leases standard on its consolidated financial statements and, if adopted by the FASB, applying the transition option and electing the practical expedient of the proposed amendment.

11

PART I.
FINANCIAL INFORMATION (CONTINUED)
Item 1.
Financial Statements (continued)
KBS STRATEGIC OPPORTUNITY REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2018
(unaudited)

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments (“ASU No. 2016-13”).  ASU No. 2016-13 affects entities holding financial assets and net investments in leases that are not accounted for at fair value through net income.  The amendments in ASU No. 2016-13 require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected.  The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset.  ASU No. 2016-13 also amends the impairment model for available-for-sale securities.  An entity will recognize an allowance for credit losses on available-for-sale debt securities as a contra-account to the amortized cost basis rather than as a direct reduction of the amortized cost basis of the investment, as is currently required.   ASU No. 2016-13 also requires new disclosures.  For financial assets measured at amortized cost, an entity will be required to disclose information about how it developed its allowance for credit losses, including changes in the factors that influenced management’s estimate of expected credit losses and the reasons for those changes.  For financing receivables and net investments in leases measured at amortized cost, an entity will be required to further disaggregate the information it currently discloses about the credit quality of these assets by year of the asset’s origination for as many as five annual periods. For available for sale securities, an entity will be required to provide a roll-forward of the allowance for credit losses and an aging analysis for securities that are past due.  ASU No. 2016-13 is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years.  Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.  The Company is still evaluating the impact of adopting ASU No. 2016-13 on its financial statements, but does not expect the adoption of ASU No. 2016-13 to have a material impact on its financial statements.
3.
REAL ESTATE HELD FOR INVESTMENT
As of March 31, 2018, the Company owned six office properties, one office portfolio consisting of four office buildings and 14 acres of undeveloped land, one office/flex/industrial portfolio consisting of 21 buildings and one retail property, encompassing, in the aggregate, approximately 3.7 million rentable square feet. As of March 31, 2018, these properties were 77% occupied. In addition, the Company owned two apartment properties, containing 383 units and encompassing approximately 0.3 million rentable square feet, which were 97% occupied. The Company also owned three investments in undeveloped land with approximately 1,100 developable acres. The following table summarizes the Company’s real estate held for investment as of March 31, 2018 and December 31, 2017, respectively (in thousands):
 
 
March 31, 2018
 
December 31, 2017
Land
 
$
186,248

 
$
162,061

Buildings and improvements
 
592,503

 
388,144

Tenant origination and absorption costs
 
36,514

 
24,479

Total real estate, cost
 
815,265

 
574,684

Accumulated depreciation and amortization
 
(46,751
)
 
(41,817
)
Total real estate, net
 
$
768,514

 
$
532,867


12

PART I.
FINANCIAL INFORMATION (CONTINUED)
Item 1.
Financial Statements (continued)
KBS STRATEGIC OPPORTUNITY REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2018
(unaudited)

The following table provides summary information regarding the Company’s real estate held for investment as of March 31, 2018 (in thousands):
Property
 
Date
Acquired or Foreclosed on
 
City
 
State
 
Property Type
 
Land
 
Building
and Improvements
 
Tenant Origination and Absorption
 
Total
Real Estate, at Cost
 
Accumulated Depreciation and Amortization
 
Total
Real Estate, Net
 
Ownership %
Richardson Portfolio:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Palisades Central I
 
11/23/2011
 
Richardson
 
TX
 
Office
 
1,037

 
10,934

 

 
11,971

 
(2,330
)
 
9,641

 
90.0
%
Palisades Central II
 
11/23/2011
 
Richardson
 
TX
 
Office
 
810

 
18,742

 

 
19,552

 
(4,384
)
 
15,168

 
90.0
%
Greenway I
 
11/23/2011
 
Richardson
 
TX
 
Office
 
561

 
2,365

 

 
2,926

 
(894
)
 
2,032

 
90.0
%
Greenway III
 
11/23/2011
 
Richardson
 
TX
 
Office
 
702

 
4,109

 
559

 
5,370

 
(1,810
)
 
3,560

 
90.0
%
Undeveloped Land
 
11/23/2011
 
Richardson
 
TX
 
Undeveloped Land
 
3,134

 

 

 
3,134

 

 
3,134

 
90.0
%
Total Richardson Portfolio
 
 
 
 
 
 
 
 
 
6,244

 
36,150

 
559

 
42,953

 
(9,418
)
 
33,535

 
 
Park Highlands (1)
 
12/30/2011
 
North Las Vegas
 
NV
 
Undeveloped Land
 
34,017

 

 

 
34,017

 

 
34,017

 
(1) 

Burbank Collection
 
12/12/2012
 
Burbank
 
CA
 
Retail
 
4,175

 
12,536

 
725

 
17,436

 
(2,579
)
 
14,857

 
90.0
%
Park Centre
 
03/28/2013
 
Austin
 
TX
 
Office
 
3,251

 
26,507

 

 
29,758

 
(3,901
)
 
25,857

 
100.0
%
Central Building
 
07/10/2013
 
Seattle
 
WA
 
Office
 
7,015

 
27,282

 
1,241

 
35,538

 
(4,952
)
 
30,586

 
100.0
%
1180 Raymond
 
08/20/2013
 
Newark
 
NJ
 
Apartment
 
8,292

 
38,208

 

 
46,500

 
(5,630
)
 
40,870

 
100.0
%
Park Highlands II
 
12/10/2013
 
North Las Vegas
 
NV
 
Undeveloped Land
 
25,229

 

 

 
25,229

 

 
25,229

 
100.0
%
424 Bedford
 
01/31/2014
 
Brooklyn
 
NY
 
Apartment
 
8,860

 
25,752

 

 
34,612

 
(3,005
)
 
31,607

 
90.0
%
Richardson Land II
 
09/04/2014
 
Richardson
 
TX
 
Undeveloped Land
 
3,418

 

 

 
3,418

 

 
3,418

 
90.0
%
Westpark Portfolio
 
05/10/2016
 
Redmond
 
WA
 
Office/Flex/Industrial
 
36,085

 
91,212

 
6,825

 
134,122

 
(9,527
)
 
124,595

 
100.0
%
Crown Pointe
 
02/14/2017
 
Dunwoody
 
GA
 
Office
 
22,590

 
61,280

 
5,648

 
89,518

 
(4,765
)
 
84,753

 
100.0
%
125 John Carpenter
 
09/15/2017
 
Irving
 
TX
 
Office
 
2,755

 
74,286

 
8,861

 
85,902

 
(2,324
)
 
83,578

 
100.0
%
Marquette Plaza
 
03/01/2018
 
Minneapolis
 
MN
 
Office
 
10,387

 
71,384

 
4,493

 
86,264

 
(335
)
 
85,929

 
100.0
%
City Tower
 
03/06/2018
 
Orange
 
CA
 
Office
 
13,930

 
127,906

 
8,162

 
149,998

 
(315
)
 
149,683

 
100.0
%
 
 
 
 
 
 
 
 
 
 
$
186,248

 
$
592,503

 
$
36,514

 
$
815,265

 
$
(46,751
)
 
$
768,514

 
 
_____________________
(1) On September 7, 2016, a subsidiary of the Company that owns a portion of Park Highlands, sold 820 units of 10% Class A non-voting preferred membership units for $0.8 million to accredited investors. The amount of the Class A non-voting preferred membership units raised, net of offering costs, is included in other liabilities on the accompanying consolidated balance sheets.
Operating Leases
Certain of the Company’s real estate properties are leased to tenants under operating leases for which the terms and expirations vary. As of March 31, 2018, the leases, excluding options to extend and apartment leases, which have terms that are generally one year or less, had remaining terms of up to 14.2 years with a weighted-average remaining term of 4.3 years. Some of the leases have provisions to extend the lease agreements, options for early termination after paying a specified penalty, rights of first refusal to purchase the property at competitive market rates, and other terms and conditions as negotiated. The Company retains substantially all of the risks and benefits of ownership of the real estate assets leased to tenants. Generally, upon the execution of a lease, the Company requires a security deposit from tenants in the form of a cash deposit and/or a letter of credit. The amount required as a security deposit varies depending upon the terms of the respective leases and the creditworthiness of the tenant, but generally are not significant amounts. Therefore, exposure to credit risk exists to the extent that a receivable from a tenant exceeds the amount of its security deposit. Security deposits received in cash and assumed in real estate acquisitions related to tenant leases are included in other liabilities in the accompanying consolidated balance sheets and totaled $4.9 million and $4.3 million as of March 31, 2018 and December 31, 2017, respectively.

13

PART I.
FINANCIAL INFORMATION (CONTINUED)
Item 1.
Financial Statements (continued)
KBS STRATEGIC OPPORTUNITY REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2018
(unaudited)

During the three months ended March 31, 2018 and 2017, the Company recognized deferred rent from tenants of $0.7 million and $0.9 million, respectively, net of lease incentive amortization. As of March 31, 2018 and December 31, 2017, the cumulative deferred rent receivable balance, including unamortized lease incentive receivables, was $8.5 million and $7.7 million, respectively, and is included in rents and other receivables on the accompanying balance sheets. The cumulative deferred rent balance included $1.0 million and $0.9 million of unamortized lease incentives as of March 31, 2018 and December 31, 2017, respectively.
As of March 31, 2018, the future minimum rental income from the Company’s properties, excluding apartment leases, under non-cancelable operating leases was as follows (in thousands):
April 1, 2018 through December 31, 2018
$
43,020

2019
55,023

2020
48,408

2021
41,681

2022
33,530

Thereafter
102,493

 
$
324,155

As of March 31, 2018, the Company’s commercial real estate properties were leased to approximately 400 tenants over a diverse range of industries and geographic areas. The Company’s highest tenant industry concentration (greater than 10% of annualized base rent) was as follows:
Industry
 
Number of Tenants
 
Annualized Base Rent (1) 
(in thousands)
 
Percentage of
Annualized Base Rent
Public Administration (Government)
 
9
 
$
6,496

 
10.6
%
_____________________
(1) Annualized base rent represents annualized contractual base rental income as of March 31, 2018, adjusted to straight-line any contractual tenant concessions (including free rent), rent increases and rent decreases from the lease’s inception through the balance of the lease term.
No other tenant industries accounted for more than 10% of annualized base rent. No material tenant credit issues have been identified at this time.
Geographic Concentration Risk
As of March 31, 2018, the Company’s real estate investments in California, Washington and Texas represented 14.7%, 13.8% and 13.0%, respectively, of the Company’s total assets.  As a result, the geographic concentration of the Company’s portfolio makes it particularly susceptible to adverse economic developments in the California, Washington and Texas real estate markets.  Any adverse economic or real estate developments in these markets, such as business layoffs or downsizing, industry slowdowns, relocations of businesses, changing demographics and other factors, or any decrease in demand for office space resulting from the local business climate, could adversely affect the Company’s operating results and its ability to make distributions to stockholders.

14

PART I.
FINANCIAL INFORMATION (CONTINUED)
Item 1.
Financial Statements (continued)
KBS STRATEGIC OPPORTUNITY REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2018
(unaudited)

Recent Acquisitions
Marquette Plaza
On March 1, 2018, the Company, through an indirect wholly owned subsidiary, acquired an office property containing 522,656 rentable square feet located on 2.5 acres of land in Minneapolis, Minnesota (“Marquette Plaza”). The seller is not affiliated with the Company or the Advisor. The purchase price (net of closing credits) of Marquette Plaza was $88.3 million plus $1.1 million of capitalized acquisition costs. The Company recorded this acquisition as an asset acquisition and recorded $10.4 million to land, $71.4 million to building and improvements, $4.5 million to tenant origination and absorption costs, $3.7 million to above-market lease assets and $0.6 million to below-market lease liabilities. The intangible assets and liabilities acquired in connection with this acquisition have weighted-average amortization periods as of the date of acquisition of 6.6 years for tenant origination and absorption costs, 11.7 years for above-market lease assets and 2.4 years for below-market lease liabilities.
City Tower
On March 6, 2018, the Company, through an indirect wholly owned subsidiary, acquired an office building containing 431,007 rentable square feet located on approximately 4.9 acres of land in Orange, California (“City Tower”). The seller is not affiliated with the Company or the Advisor. The purchase price (net of closing credits) of City Tower was $147.1 million plus $1.6 million of capitalized acquisition costs. The Company recorded this acquisition as an asset acquisition and recorded $13.9 million to land, $127.9 million to building and improvements, $8.1 million to tenant origination and absorption costs and $1.2 million to below-market lease liabilities. The intangible assets and liabilities acquired in connection with this acquisition have weighted-average amortization periods as of the date of acquisition of 5.2 years for tenant origination and absorption costs and 6.6 years for below-market lease liabilities.
Recent Real Estate Land Sale
On February 28, 2018, the Company sold approximately 26 developable acres of Park Highlands undeveloped land for an aggregate sales price, net of closing credits, of $2.5 million, excluding closing costs. The purchasers are not affiliated with the Company or the Advisor. The Company recognized a gain on sale of $0.6 million related to the land sale, which is net of deferred profit of $0.3 million related to proceeds received from the purchaser for the value of land that was contributed to a master association which is consolidated by the Company. 
4.
TENANT ORIGINATION AND ABSORPTION COSTS, ABOVE-MARKET LEASE ASSETS AND BELOW-MARKET LEASE LIABILITIES
As of March 31, 2018 and December 31, 2017, the Company’s tenant origination and absorption costs, above-market lease assets and below-market lease liabilities (excluding fully amortized assets and liabilities and accumulated amortization) were as follows (in thousands):
 
 
Tenant Origination and
Absorption Costs
 
Above-Market
Lease Assets
 
Below-Market
Lease Liabilities
 
 
March 31, 2018
 
December 31, 2017
 
March 31, 2018
 
December 31, 2017
 
March 31, 2018
 
December 31, 2017
Cost
 
$
36,514

 
$
24,479

 
$
4,015

 
$
301

 
$
(5,320
)
 
$
(3,636
)
Accumulated Amortization
 
(7,365
)
 
(6,448
)
 
(214
)
 
(170
)
 
941

 
793

Net Amount
 
$
29,149

 
$
18,031

 
$
3,801

 
$
131

 
$
(4,379
)
 
$
(2,843
)

15

PART I.
FINANCIAL INFORMATION (CONTINUED)
Item 1.
Financial Statements (continued)
KBS STRATEGIC OPPORTUNITY REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2018
(unaudited)

Increases (decreases) in net income as a result of amortization of the Company’s tenant origination and absorption costs, above-market lease assets and below-market lease liabilities for the three months ended March 31, 2018 and 2017 were as follows (in thousands):
 
 
Tenant Origination and
Absorption Costs
 
Above-Market
Lease Assets
 
Below-Market
Lease Liabilities
 
 
For the Three Months Ended
March 31,
 
For the Three Months Ended
March 31,
 
For the Three Months Ended
March 31,
 
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
Amortization
 
$
(1,537
)
 
$
(2,943
)
 
$
(44
)
 
$
(89
)
 
$
270

 
$
983

Additionally, as of March 31, 2018 and December 31, 2017, the Company had recorded tax abatement intangible assets, net of amortization, which are included in prepaid expenses and other assets in the accompanying balance sheets, of $5.1 million and $5.3 million, respectively.  During the three months ended March 31, 2018 and 2017, the Company recorded amortization expense of $0.2 million and $0.3 million, respectively, related to tax abatement intangible assets. 
5.
REAL ESTATE EQUITY SECURITIES
As of March 31, 2018, the Company owned three investments in real estate equity securities. The following table sets forth the number of shares owned by the Company and the related carrying value of the shares as of March 31, 2018 and December 31, 2017 (dollars in thousands):
 
 
March 31, 2018
 
December 31, 2017
Real Estate Equity Security
 
Number of Shares Owned
 
Total Carrying Value
 
Number of Shares Owned
 
Total Carrying Value
Whitestone REIT
 
3,768,189

 
$
39,151

 
3,603,189

 
$
51,922

Keppel-KBS US REIT
 
43,999,500

 
37,566

 
43,999,500

 
38,141

Franklin Street Properties Corp.
 
1,462,274

 
12,298

 

 

 
 
49,229,963

 
$
89,015

 
47,602,689

 
$
90,063

During the three months ended March 31, 2018, the Company purchased 165,000 shares of common stock of Whitestone REIT (NYSE Ticker: WSR) for an aggregate purchase price of $1.9 million and 1,462,274 shares of common stock of Franklin Street Properties Corp. (NYSE Ticker: FSP) for an aggregate purchase price of $13.1 million.
On November 8, 2017, the Company acquired 43,999,500 shares of common units of Keppel-KBS US REIT (SGX Ticker: CMOU) in connection with the sale of 11 properties to Keppel-KBS US REIT. The Company agreed not to sell, transfer or assign 21,999,750 units of the Keppel-KBS US REIT issued to the Company at closing of the transaction until May 8, 2018 and the remaining 21,999,750 units until November 8, 2018 (the “Unit Lockout Periods”). As of March 31, 2018 and December 31, 2017, a lack of marketability discount of $1.2 million and $1.7 million, respectively, was recorded as a result of the Unit Lockout Periods.

16

PART I.
FINANCIAL INFORMATION (CONTINUED)
Item 1.
Financial Statements (continued)
KBS STRATEGIC OPPORTUNITY REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2018
(unaudited)

The following summarizes the activity related to real estate equity securities for the three months ended March 31, 2018 (in thousands): 
 
 
Amortized Cost Basis
 
Unrealized Gains (Losses) (1)
 
Total
Real estate equity securities - December 31, 2017
 
$
64,917

 
$
25,146

 
$
90,063

Acquisition of real estate equity securities
 
14,799

 

 
14,799

Acquisition fee to affiliate and purchase commission
 
164

 

 
164

Unrealized change in market value of real estate equity securities
 

 
(16,011
)
 
(16,011
)
Real estate equity securities - March 31, 2018
 
$
79,880

 
$
9,135

 
$
89,015

_____________________
(1) As of December 31, 2017, unrealized gain (losses) due to the change in market value of real estate equity securities was recorded to accumulated other comprehensive income. Effective January 1, 2018, upon the adoption of ASU No. 2016-01, unrealized gain (losses) on real estate equity securities are recorded in earnings on the accompanying consolidated statement of operations.
During the three months ended March 31, 2018, the Company recognized $1.1 million of dividend income from real estate equity securities.
6.
REAL ESTATE DEBT SECURITIES
As of March 31, 2018, the Company owned an investment in real estate debt securities. The Company’s investment in real estate debt securities is classified as held to maturity, as the Company has the intent and ability to hold its investment until maturity, and it is not more likely than not that the Company would be required to sell its investment before recovery of the Company’s amortized cost basis.  The information for those real estate debt securities as of March 31, 2018 and December 31, 2017 is set forth below (in thousands):
Debt Securities Name
 
Dates Acquired
 
Debt Securities Type
 
Outstanding Principal Balance as of
March 31, 2018 (1)
 
Book Value as of
March 31, 2018 (2)
 
Book Value as of
December 31, 2017 (2)
 
Contractual Interest Rate (3)
 
Annualized Effective
Interest Rate (3)
 
Maturity Date
Battery Point Series B Preferred Units
 
10/28/2016 /
03/30/2017 /
05/12/2017
 
Series B Preferred Units
 
$
17,500

 
$
17,858

 
$
17,751

 
9.0
%
 
11.1
%
 
10/28/2019
_____________________
(1) Outstanding principal balance as of March 31, 2018 represents principal balance outstanding under the real estate debt securities.
(2) Book value of the real estate debt securities represents outstanding principal balance adjusted for unamortized acquisition discounts, origination fees and direct origination and acquisition costs and additional interest accretion.
(3) Contractual interest rate is the stated interest rate on the face of the real estate securities.  Annualized effective interest rate is calculated as the actual interest income recognized in 2018, using the interest method, annualized (if applicable) and divided by the average amortized cost basis of the investment.  The annualized effective interest rate and contractual interest rate presented are as of March 31, 2018.

17

PART I.
FINANCIAL INFORMATION (CONTINUED)
Item 1.
Financial Statements (continued)
KBS STRATEGIC OPPORTUNITY REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2018
(unaudited)

The following summarizes the activity related to real estate debt securities for the three months ended March 31, 2018 (in thousands): 
Real estate debt securities - December 31, 2017
 
$
17,751

Deferred interest receivable and interest accretion
 
96

Accretion of commitment fee, net of closing costs
 
11

Real estate debt securities - March 31, 2018
 
$
17,858

For the three months ended March 31, 2018 and 2017, interest income from real estate debt securities consisted of the following (in thousands):
 
 
For the Three Months Ended
March 31,
 
 
2018
 
2017
Contractual interest income
 
$
394

 
$
91

Interest accretion
 
96

 
44

Accretion of commitment fee, net of closing costs and acquisition fee
 
11

 
25

Interest income from real estate debt securities
 
$
501

 
$
160

7.
REAL ESTATE SALES
During the three months ended March 31, 2018, the Company did not dispose of any real estate properties. During the year ended December 31, 2017, the Company disposed of 12 office properties. The operations of these properties and gain on sales are included in continuing operations on the accompanying statements of operations. The following table summarizes certain revenue and expenses related to these properties for the three months ended March 31, 2018 and 2017 (in thousands):
 
 
Three Months Ended March 31,
 
 
2018
 
2017
Revenues
 
 
 
 
Rental income
 
$

 
$
17,484

Tenant reimbursements and other operating income
 

 
4,855

Total revenues
 
$

 
$
22,339

Expenses
 
 
 
 
Operating, maintenance, and management
 
$

 
$
6,142

Real estate taxes and insurance
 

 
3,003

Asset management fees to affiliate
 

 
1,356

Depreciation and amortization
 

 
8,035

Interest expense
 

 
3,124

Total expenses
 
$

 
$
21,660


18

PART I.
FINANCIAL INFORMATION (CONTINUED)
Item 1.
Financial Statements (continued)
KBS STRATEGIC OPPORTUNITY REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2018
(unaudited)

8.
NOTES AND BONDS PAYABLE
As of March 31, 2018 and December 31, 2017, the Company’s notes and bonds payable, including notes payable related to real estate held for sale, consisted of the following (dollars in thousands):
 
 
Book Value as of
March 31, 2018
 
Book Value as of
December 31, 2017
 
Contractual Interest Rate as of March 31, 2018 (1)
 
Effective Interest Rate at March 31, 2018 (1)
 
Payment Type
 
Maturity Date (2)
Richardson Portfolio Mortgage Loan
 
$
36,735

 
$
36,886

 
One-Month LIBOR + 2.10%
 
3.77%
 
Principal & Interest
 
05/01/2018 (3)
Portfolio Mortgage Loan (4)
 
9,509

 
9,877

 
One-Month LIBOR + 2.25%
 
3.91%
 
Principal & Interest
 
07/01/2018
Burbank Collection Mortgage Loan
 
10,898

 
10,958

 
One-Month LIBOR + 2.35%
 
4.04%
 
Principal & Interest
 
09/30/2018
1180 Raymond Bond Payable
 
6,415

 
6,460

 
6.50%
 
6.50%
 
Principal & Interest
 
09/01/2036
Central Building Mortgage Loan
 
27,600

 
27,600

 
One-Month LIBOR + 1.75%
 
3.41%
 
Interest Only
 
11/13/2018
424 Bedford Mortgage Loan
 
24,138

 
24,282

 
3.91%
 
3.91%
 
Principal & Interest
 
10/01/2022
1180 Raymond Mortgage Loan
 
30,911

 
31,000

 
One-Month LIBOR + 2.25%
 
3.91%
 
Principal & Interest
 
12/01/2018
KBS SOR (BVI) Holdings, Ltd. Series A Debentures (5)
 
277,795

 
278,801

 
4.25%
 
4.25%
 
(5) 
 
03/01/2023
Westpark Portfolio Mortgage Loan
 
85,200

 
85,200

 
One-Month LIBOR + 2.50%
 
4.16%
 
Interest Only (6)
 
07/01/2020
Crown Pointe Mortgage Loan
 
50,500

 
50,500

 
One-Month LIBOR + 2.60%
 
4.26%
 
Interest Only
 
02/13/2020
125 John Carpenter Mortgage Loan
 
50,130

 
50,130

 
(7) 
 
3.42%
 
Interest Only
 
10/01/2022
City Tower Mortgage Loan
 
89,000

 

 
One-Month LIBOR + 1.55%
 
3.24%
 
Interest Only
 
03/05/2021
Total Notes and Bonds Payable principal outstanding
 
698,831

 
611,694

 
 
 
 
 
 
 
 
Net Premium/(Discount) on Notes and Bonds Payable (8)
 
151

 
137

 
 
 
 
 
 
 
 
Deferred financing costs, net
 
(9,228
)
 
(8,788
)
 
 
 
 
 
 
 
 
Total Notes and Bonds Payable, net
 
$
689,754

 
$
603,043

 
 
 
 
 
 
 
 
_____________________
(1) Contractual interest rate represents the interest rate in effect under the loan as of March 31, 2018. Effective interest rate is calculated as the actual interest rate in effect as of March 31, 2018 (consisting of the contractual interest rate and contractual floor rates), using interest rate indices at March 31, 2018, where applicable.
(2) Represents the initial maturity date or the maturity date as extended as of March 31, 2018; subject to certain conditions, the maturity dates of certain loans may be extended beyond the date shown.
(3) Subsequent to March 31, 2018, the maturity date of the Richardson Portfolio Mortgage Loan was extended to November 1, 2018.
(4) The Portfolio Mortgage Loan is secured by Park Centre.
(5) See “ – Israeli Bond Financing” below.
(6) Represents the payment type required under the loan as of March 31, 2018. Certain future monthly payments due under this loan also include amortizing principal payments. For more information of the Company’s contractual obligations under its notes and bonds payable, see five-year maturity table below.
(7) The 125 John Carpenter Mortgage Loan bears interest at a floating rate of the greater of (a) 2.0% or (b) 175 basis points over one-month LIBOR.
(8) Represents the unamortized premium/discount on notes and bonds payable due to the above- and below-market interest rates when the debt was assumed. The discount/premium is amortized over the remaining life of the notes and bonds payable.

19

PART I.
FINANCIAL INFORMATION (CONTINUED)
Item 1.
Financial Statements (continued)
KBS STRATEGIC OPPORTUNITY REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2018
(unaudited)

During the three months ended March 31, 2018 and 2017, the Company incurred $6.6 million and $9.4 million, respectively, of interest expense. Included in interest expense for the three months ended March 31, 2018 and 2017 was $0.8 million and $1.3 million, respectively, of amortization of deferred financing costs. Additionally, during each of the three months ended March 31, 2018 and 2017, the Company capitalized $0.6 million of interest related to its investments in undeveloped land.
As of March 31, 2018 and December 31, 2017, the Company’s interest payable was $2.4 million and $5.1 million, respectively.
The following is a schedule of maturities, including principal amortization payments, for all notes and bonds payable outstanding as of March 31, 2018 (in thousands):
April 1, 2018 through December 31, 2018
 
$
116,680

2019
 
57,448

2020
 
190,572

2021
 
145,438

2022
 
127,724

Thereafter
 
60,969

 
 
$
698,831

The Company’s notes payable contain financial debt covenants. As of March 31, 2018, the Company was in compliance with all of these debt covenants.
Israeli Bond Financing
On March 2, 2016, KBS Strategic Opportunity BVI, a wholly owned subsidiary of the Company, filed a final prospectus with the Israel Securities Authority for a proposed offering of up to 1,000,000,000 Israeli new Shekels of Series A debentures (the “Debentures”) at an annual interest rate not to exceed 4.25%. On March 1, 2016, KBS Strategic Opportunity BVI commenced the institutional tender of the Debentures and accepted application for 842.5 million Israeli new Shekels. On March 7, 2016, KBS Strategic Opportunity BVI commenced the public tender of the Debentures and accepted 127.7 million Israeli new Shekels.  In the aggregate, KBS Strategic Opportunity BVI accepted 970.2 million Israeli new Shekels (approximately $249.2 million as of March 8, 2016) in both the institutional and public tenders at an annual interest rate of 4.25%.  KBS Strategic Opportunity BVI issued the Debentures on March 8, 2016. The terms of the Debentures require principal installment payments equal to 20% of the face value of the Debentures on March 1st of each year from 2019 to 2023. As of March 31, 2018, the Company has one foreign currency option for an aggregate notional amount of $285.4 million to hedge its exposure to foreign currency exchange rate movements. See note 9, “Derivative Instruments” for a further discussion on the Company’s foreign currency option.
The deed of trust that governs the terms of the Debentures contains various financial covenants. As of March 31, 2018, the Company was in compliance with all of these financial debt covenants.
Recent Financing Transaction
City Tower Mortgage Loan
On March 6, 2018, in connection with the Company’s acquisition of City Tower, the Company, through an indirect wholly owned subsidiary (the “Owner”) entered into a term loan facility with Compass Bank, an unaffiliated lender, for borrowings up to $103.4 million, secured by City Tower (the “City Tower Mortgage Loan”). At closing, $89.0 million of the loan was funded and the remaining $14.4 million was available for future disbursements to be used for leasing commissions and capital expenditures, subject to certain terms and conditions contained in the loan documents.

20

PART I.
FINANCIAL INFORMATION (CONTINUED)
Item 1.
Financial Statements (continued)
KBS STRATEGIC OPPORTUNITY REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2018
(unaudited)

The City Tower Mortgage Loan matures on March 5, 2021, with two one-year extension options, subject to certain terms and conditions contained in the loan documents, and bears interest at a floating rate of 155 basis points over one-month LIBOR. On April 2, 2018, the Owner entered into an interest rate cap that effectively limits one-month LIBOR on 75% of the loan amount, a notional amount of $77.5 million, at 3.50% effective April 2, 2018 through March 5, 2021. Monthly payments are interest only with the principal balance, all accrued and unpaid interest and all other sums due under the loan documents due at maturity. The Owner has the right to prepay all or a portion of the City Tower Mortgage Loan, subject to certain fees and conditions contained in the loan documents.
KBS SOR Properties, LLC, the Company’s wholly owned subsidiary, in connection with the City Tower Mortgage Loan, is providing a guaranty of (i) the payment of all actual costs, losses, damages, claims and expenses incurred by Compass Bank relating to the City Tower Mortgage Loan as a result of certain intentional actions or omissions of the Owner in violation of the loan documents, as further described in the guaranty; (ii) the payment of the principal balance and any interest or other sums outstanding under the City Tower Mortgage Loan in the event of certain bankruptcy, insolvency or related proceedings involving the Owner as described in the guaranty; and (iii) certain other amounts as described in the guaranty.
9.
DERIVATIVE INSTRUMENTS
The Company enters into derivative instruments for risk management purposes to hedge its exposure to cash flow variability caused by changing interest rates and foreign currency exchange rate movements. The primary goal of the Company’s risk management practices related to interest rate risk is to prevent changes in interest rates from adversely impacting the Company’s ability to achieve its investment return objectives. The Company does not enter into derivatives for speculative purposes.
The Company enters into foreign currency options and foreign currency collars to mitigate its exposure to foreign currency exchange rate movements on its bonds payable outstanding denominated in Israeli new Shekels. A foreign currency collar consists of a purchased call option to buy and a sold put option to sell Israeli new Shekels. A foreign currency collar guarantees that the exchange rate of the currency will not fluctuate beyond the range of the options’ strike prices. A foreign currency option consists of a call option to buy Israeli new Shekels.
As of March 31, 2018, the Company had entered into a foreign currency option, a USD put/ILS call option, to hedge against a change in the exchange rate of the Israeli new Shekel versus the U.S. Dollar as it has the right, but not the obligation, to purchase up to 970.2 million Israeli Shekels at the rate of ILS 3.4 per USD. The cost of the foreign currency option was $3.4 million. The following table summarizes the notional amount and other information related to the Company’s foreign currency option as of March 31, 2018. The notional amount is an indication of the extent of the Company’s involvement in each instrument at that time, but does not represent exposure to credit, interest rate or market risks (currency in thousands):
Derivative Instrument
 
Notional Amount
 
Strike Price
 
Trade Date
 
Maturity Date
Derivative instrument not designated as hedging instrument
 
 
 
 
 
 
Foreign currency option
 
$
285,361

 
3.40 ILS-USD
 
08/03/2017
 
08/03/2018
The Company enters into interest rate caps to mitigate its exposure to rising interest rates on its variable rate notes payable. The values of interest rate caps are primarily impacted by interest rates, market expectations about interest rates, and the remaining life of the instrument. In general, increases in interest rates, or anticipated increases in interest rates, will increase the value of interest rate caps. As the remaining life of an interest rate cap decreases, the value of the instrument will generally decrease towards zero.

21

PART I.
FINANCIAL INFORMATION (CONTINUED)
Item 1.
Financial Statements (continued)
KBS STRATEGIC OPPORTUNITY REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2018
(unaudited)

As of March 31, 2018, the Company had entered into an interest rate cap, which was not designated as a hedging instrument. The following table summarizes the notional amount and other information related to the Company’s derivative instrument as of March 31, 2018. The notional amount is an indication of the extent of the Company’s involvement in the instrument at that time, but does not represent exposure to credit, interest rate or market risks (dollars in thousands):
Derivative Instrument
 
Effective Date
 
Maturity Date
 
Notional Value
 
Reference Rate
Interest rate cap
 
02/21/2017
 
02/13/2020
 
$
46,875

 
One-month LIBOR at 3.00%
The following table sets forth the fair value of the Company’s derivative instruments as well as their classification on the consolidated balance sheets as of March 31, 2018 and December 31, 2017 (dollars in thousands):
 
 
 
 
March 31, 2018
 
December 31, 2017
Derivative Instruments
 
Balance Sheet Location
 
Number of Instruments
 
Fair Value
 
Number of Instruments
 
Fair Value
Derivative instruments not designated as hedging instruments
 
 
 
 
 
 
 
 
Interest rate cap
 
Prepaid expenses and other assets
 
1
 
$
45

 
1
 
$
14

Foreign currency option
 
Prepaid expenses and other assets
 
1
 
$
2,226

 
1
 
$
4,243

The change in fair value of foreign currency options and collars that are not designated as cash flow hedges are recorded as foreign currency transaction gains or losses in the accompanying consolidated statements of operations. During the three months ended March 31, 2018, the Company recognized a $2.0 million loss related to the foreign currency option, which is shown net against $1.0 million of foreign currency transaction gain in the accompanying consolidated statements of operations as foreign currency transaction loss, net. During the three months ended March 31, 2017, the Company recognized an $11.1 million gain related to the foreign currency collars, which is shown net against $15.8 million of foreign currency transaction loss in the accompanying consolidated statements of operations as foreign currency transaction loss, net. During the three months ended March 31, 2018, the Company recorded an unrealized gain of $31,000 on interest rate caps, which was included as an offset to interest expense on the accompanying consolidated statements of operations. During the three months ended March 31, 2017, the Company recorded an unrealized loss of $57,000 on interest rate caps, which was included in interest expense on the accompanying consolidated statements of operations.
10.
FAIR VALUE DISCLOSURES
Under GAAP, the Company is required to measure certain financial instruments at fair value on a recurring basis. In addition, the Company is required to measure other non-financial and financial assets at fair value on a non-recurring basis (e.g., carrying value of impaired real estate loans receivable and long-lived assets). Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The GAAP fair value framework uses a three-tiered approach. Fair value measurements are classified and disclosed in one of the following three categories:
Level 1: unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities;
Level 2: quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and
Level 3: prices or valuation techniques where little or no market data is available that requires inputs that are both significant to the fair value measurement and unobservable.

22

PART I.
FINANCIAL INFORMATION (CONTINUED)
Item 1.
Financial Statements (continued)
KBS STRATEGIC OPPORTUNITY REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2018
(unaudited)

The fair value for certain financial instruments is derived using valuation techniques that involve significant management judgment. The price transparency of financial instruments is a key determinant of the degree of judgment involved in determining the fair value of the Company’s financial instruments. Financial instruments for which actively quoted prices or pricing parameters are available and for which markets contain orderly transactions will generally have a higher degree of price transparency than financial instruments for which markets are inactive or consist of non-orderly trades. The Company evaluates several factors when determining if a market is inactive or when market transactions are not orderly. The following is a summary of the methods and assumptions used by management in estimating the fair value of each class of financial instruments for which it is practicable to estimate the fair value:
Cash and cash equivalents, restricted cash, rent and other receivables and accounts payable and accrued liabilities: These balances approximate their fair values due to the short maturities of these items.
Real estate equity securities: The Company’s Whitestone REIT and Franklin Street Properties Corp. real estate equity securities are presented at fair value on the accompanying consolidated balance sheet. The fair values of Whitestone REIT and Franklin Street Properties Corp. real estate equity securities were based on quoted prices in an active market on a major stock exchange. The Company classifies these inputs as Level 1 inputs. As of March 31, 2018, the Company owned 43,999,500 shares of common units of Keppel-KBS US REIT. The fair value measurement of these shares is based on a quoted price in an active market, adjusted for the lack of marketability during the Unit Lockout Periods. The Company utilized inputs, all of which were deemed to be significant, including the quoted stock price, risk-free rate and expected volatility, in determining the value of the shares and the Company notes that the most significant input in its valuation model is the quoted price in an active market. However, as the valuation of the stock is adjusted for the lack of marketability using market-corroborated inputs, the Company categorizes the measurement of such securities as Level 2 inputs.
Real estate debt securities: The Company’s real estate debt securities are presented in the accompanying consolidated balance sheets at their amortized cost net of recorded loss reserves (if any) and not at fair value.  The fair value of real estate debt securities was estimated using an internal valuation model that considers the expected cash flows for the loans, underlying collateral values (for collateral dependent loans) and estimated yield requirements of institutional investors for real estate debt securities with similar characteristics, including remaining loan term, loan-to-value, type of collateral and other credit enhancements.  The Company classifies these inputs as Level 3 inputs.
Notes and bonds payable: The fair values of the Company’s notes and bonds payable are estimated using a discounted cash flow analysis based on management’s estimates of current market interest rates for instruments with similar characteristics, including remaining loan term, loan-to-value ratio, type of collateral and other credit enhancements. Additionally, when determining the fair value of liabilities in circumstances in which a quoted price in an active market for an identical liability is not available, the Company measures fair value using (i) a valuation technique that uses the quoted price of the identical liability when traded as an asset or quoted prices for similar liabilities or similar liabilities when traded as assets or (ii) another valuation technique that is consistent with the principles of fair value measurement, such as the income approach or the market approach. The Company classifies these inputs as Level 3 inputs. The Company’s bonds issued in Israel are publicly traded on the Tel-Aviv Stock Exchange. The Company used the quoted price as of March 31, 2018 for the fair value of its bonds issued in Israel. The Company classifies this input as a Level 1 input.
Derivative instruments: The Company’s derivative instruments are presented at fair value on the accompanying consolidated balance sheets.  The valuation of these instruments is determined using a proprietary model that utilizes observable inputs.  As such, the Company classifies these inputs as Level 2 inputs. The fair value of interest rate caps (floors) are determined using the market standard methodology of discounting the future expected cash payments (receipts) which would occur if variable interest rates rise above (below) the strike rate of the caps (floors). The variable interest rates used in the calculation of projected payments (receipts) on the cap (floor) are based on an expectation of future interest rates derived from observed market interest rate curves and volatilities. The fair value of foreign currency option is based on a Black-Scholes model tailored for currency derivatives.

23

PART I.
FINANCIAL INFORMATION (CONTINUED)
Item 1.
Financial Statements (continued)
KBS STRATEGIC OPPORTUNITY REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2018
(unaudited)

The following were the face values, carrying amounts and fair values of the Company’s financial instruments as of March 31, 2018 and December 31, 2017, which carrying amounts do not approximate the fair values (in thousands):
 
 
March 31, 2018
 
December 31, 2017
 
 
Face Value
 
Carrying Amount
 
Fair Value
 
Face Value
 
Carrying Amount
 
Fair Value
Financial asset:
 
 
 
 
 
 
 
 
 
 
 
 
Real estate debt securities
 
$
17,500

 
$
17,858

 
$
17,446

 
$
17,500

 
$
17,751

 
$
17,386

Financial liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Notes and bond payable
 
$
421,036

 
$
417,968

 
$
423,892

 
$
332,893

 
$
330,727

 
$
335,212

KBS SOR (BVI) Holdings, Ltd. Series A Debentures
 
$
277,795

 
$
271,786

 
$
285,184

 
$
278,801

 
$
272,316

 
$
296,069

Disclosure of the fair value of financial instruments is based on pertinent information available to the Company as of the period end and requires a significant amount of judgment. This has made the estimation of fair values difficult and, therefore, both the actual results and the Company’s estimate of value at a future date could be materially different.
As of March 31, 2018, the Company measured the following assets at fair value (in thousands):
 
 
 
 
Fair Value Measurements Using
 
 
Total
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
Recurring Basis:
 
 
 
 
 
 
 
 
Real estate equity securities
 
$
89,015

 
$
51,449

 
$
37,566

 
$

Asset derivative - interest rate cap
 
$
45

 
$

 
$
45

 
$

Asset derivative - foreign currency option
 
$
2,226

 
$

 
$
2,226

 
$

11.
RELATED PARTY TRANSACTIONS
The Advisory Agreement entitles the Advisor to specified fees upon the provision of certain services with regard to the investment of funds in real estate and real estate-related investments and the disposition of real estate and real estate-related investments (including the discounted payoff of non-performing loans) among other services, as well as reimbursement of certain costs incurred by the Advisor in providing services to the Company. The Advisory Agreement may also entitle the Advisor to certain back-end cash flow participation fees. The Company also entered into a fee reimbursement agreement (the “AIP Reimbursement Agreement”) with KBS Capital Markets Group LLC, the dealer manager for the Company’s initial public offering (the “Dealer Manager”), pursuant to which the Company agreed to reimburse the Dealer Manager for certain fees and expenses it incurs for administering the Company’s participation in the Depository Trust & Clearing Corporation Alternative Investment Product Platform with respect to certain accounts of the Company’s investors serviced through the platform. The Advisor and Dealer Manager also serve as, or previously served as, the advisor and dealer manager, respectively, for KBS Real Estate Investment Trust, Inc. (“KBS REIT I”), KBS Real Estate Investment Trust II, Inc. (“KBS REIT II”), KBS Real Estate Investment Trust III, Inc. (“KBS REIT III”), KBS Legacy Partners Apartment REIT, Inc. (“KBS Legacy Partners Apartment REIT”), KBS Strategic Opportunity REIT II, Inc. (“KBS Strategic Opportunity REIT II”) and KBS Growth & Income REIT, Inc. (“KBS Growth & Income REIT”).

24

PART I.
FINANCIAL INFORMATION (CONTINUED)
Item 1.
Financial Statements (continued)
KBS STRATEGIC OPPORTUNITY REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2018
(unaudited)

On January 6, 2014, the Company, together with KBS REIT I, KBS REIT II, KBS REIT III, KBS Legacy Partners Apartment REIT, KBS Strategic Opportunity REIT II, the Dealer Manager, the Advisor and other KBS-affiliated entities, entered into an errors and omissions and directors and officers liability insurance program where the lower tiers of coverage are shared. The cost of these lower tiers is allocated by the Advisor and its insurance broker among each of the various entities covered by the plan, and is billed directly to each entity. The allocation of these shared coverage costs is proportionate to the pricing by the insurance marketplace for the first tiers of directors and officers liability coverage purchased individually by each REIT. The Advisor’s and the Dealer Manager’s portion of the shared lower tiers’ cost is proportionate to the respective entities’ prior cost for the errors and omissions insurance. In June 2015, KBS Growth & Income REIT was added to the insurance program at terms similar to those described above. In June 2017, the Company renewed its participation in the program, and the program is effective through June 30, 2018. As KBS REIT I was implementing its plan of liquidation, at renewal in June 2017, KBS REIT I elected to cease participation in the program and obtain separate insurance coverage.
During the three months ended March 31, 2018 and 2017, no other business transactions occurred between the Company and these other KBS-sponsored programs.
Pursuant to the terms of these agreements, summarized below are the related-party costs incurred by the Company for the three months ended March 31, 2018 and 2017, respectively, and any related amounts payable as of March 31, 2018 and December 31, 2017 (in thousands):
 
 
Incurred
 
Payable as of
 
 
Three Months Ended March 31,
 
March 31, 2018
 
December 31, 2017
 
 
2018
 
2017
 
 
Expensed
 
 
 
 
 
 
 
 
Asset management fees
 
1,825

 
2,748

 
$

 
$

Reimbursable operating expenses (1)
 
83

 
69

 
47

 
26

Capitalized
 
 
 
 
 
 
 
 
Acquisition fees on real estate
 
2,360

 
836

 

 

Acquisition fees on real estate equity securities
 
148

 

 

 

 
 
$
4,416

 
$
3,653

 
$
47

 
$
26

_____________________
(1) The Advisor may seek reimbursement for certain employee costs under the Advisory Agreement. The Company has reimbursed the Advisor for the Company’s allocable portion of the salaries, benefits and overhead of internal audit department personnel providing services to the Company. These amounts totaled $83,000 and